Spain also rises

July 26, 2012, Thursday/ 16:41:00

MADRID -- July will enter Spanish history as having started on a tremendous high, spurred by Spain's recent triumph in the 2012 Euro Football Championship. But all signs indicate that the month will end in doubt and pessimism.

The image of joyful crowds and Spanish flags draped from cars and windows has given way to that of throngs of demonstrators holding banners protesting the government's latest austerity measures. With one in four Spaniards unemployed and Spain's sovereign bonds rated just above junk status, Spain seems to be on the edge of falling into the abyss.

But very few analyses delve beneath the surface of immediate figures and assess the core of Spain's strengths and weaknesses. Observers today tend to forget that, until the early 1980s, Spain qualified as a developing country, according to World Bank standards. Indeed, together with Singapore and Ireland, Spain represents the biggest economic success story of the last quarter of the 20th century. And it should not be forgotten that, together with an astounding leap in gross domestic product (GDP) per capita (from $7,284 in 1980 to over $30,000 in 2010), Spain, under King Juan Carlos's invaluable leadership, carried out a successful transition to democracy and joined the European Union.

Such feats always entail important asymmetries and political pacts; though fundamental to the post-Franco transition, when Spaniards were still fearful of reviving the deep divisions of the civil war, they plague the country to this day. Furthermore, Spain's success, coupled with lax credit policy in the eurozone, resulted in a financial bubble whose collapse exposed structural challenges. As a result, Spain now requires a concerted effort from its citizens, one rooted in confidence in their achievements of the last 30 years.

One area in grave need of reform is the labor market. The foundations of Spain's current labor laws date to 1938, when the civil war was tearing the country apart. The system created by Generalissimo Francisco Franco following his victory offered workers job security and strong collective-bargaining rights, which helped to maintain social stability in the absence of democracy.

Paradoxically, the bulk of this platform has survived as a banner of the left. Changing it is, therefore, not only vital for regaining competitiveness; it is also a critical test of the maturity of Spain's democracy.

The current system underpins Spain's soaring unemployment rate. Since the second half of the 1980s, when net emigration abruptly reversed, Spain has experienced high levels of structural unemployment, even when annual growth was above 4 percent, in part owing to the high quality and generous provisions of Spain's social-welfare system, which was also consolidated in the post-Franco period. As of 2011, an estimated 5.7 million residents (12 percent of the population) were immigrants -- over a million more than in the significantly larger United Kingdom (with a population of 62 million).

International observers often also target the need to reduce public employment. Here, too, the problem is a direct consequence of the political agreements reached at the beginning of the transition to democracy. The public sector underwent rapid and radical decentralization as part of the transition, owing to the creation of the country's quasi-federal governmental structure, which created significant overlap and duplication, both in terms of effort and resources.

Meanwhile, it distorts reality to view Spain's entire banking sector through the prism of the cajas, the savings banks that are the soft underbelly of the Spanish financial system. Indeed, Santander and BBVA rank among today's most successful international banks. Nevertheless, it was the cajas that concentrated the risk associated with the housing bubble, and whose governance presented the worst face of public ownership. The cajas had neither the corporate governance structures nor the management skills to withstand the crisis.

Moreover, Spanish schools trail behind in the international ranking system; the relatively effective Franco-era vocational training system became collateral damage in the transition; and the low number of patent applications reveals severe shortcomings in research and development. This hindrance to competitiveness is also linked to an underperforming, state-regulated higher-education system, with no Spanish public university among the top 150 ranked in the 2012 Academic Ranking of World Universities, whereas three private institutions (IE, IESE and ESADE) are all ranked among the top business schools worldwide.

Today, Spain has some of Europe's best infrastructure, including high-speed trains, high-tech airports, fast highways, and top-notch green-energy networks. Its entrepreneurial class has pioneered business ventures, such as Inditex and Mercadona, whose models are case studies in the best business schools.

Spain counts a fair number of successful, cutting-edge multinationals, from Ferrovial and FCC in public works to Iberdrola and Abengoa in the energy sector. It is also important to emphasize the political stability -- and public maturity -- that allowed a party whose program called for rationalization of spending to win an absolute majority in the parliamentary election held six months ago.

Spain's football victory was not a fluke but the culmination of a long evolution to emerge as a winning machine from its Francoist furia española past. After Spain's victories at Euro 2008 and the 2010 World Cup, the national team demonstrated once again how diversity can coalesce into a winning formula through identification with a common goal.

Spaniards in general, and particularly their political leaders, must rediscover what it takes to succeed. Dealt a difficult hand, Spain can overcome its critical situation only through collective hard work, responsibility, respect and loyalty, thereby ensuring its standing in Europe and beyond.

*Ana Palacio, a former Spanish foreign minister and former senior vice president of the World Bank, is a member of the Spanish Council of State. © Project Syndicate 2012

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